Teetering at Multi-Month Trend Support – Levels for XAG/USD

Silver Price Outlook:

• Silver prices are on the cusp of returning below the downtrend from the April and August highs.
• Even though the US Dollar (via the DXY Index) has pulled back in recent days, elevated US yields (both nominal and real) are standing in the way of silver prices.
• Recent changes in sentiment suggest that silver prices have a mixed bias.

Still an Uphill Climb

Silver prices are treading water after rebounding at the start of the week, but are finding no significant follow-through to the upside. The fundamental backdrop remains challenging, with Fed rate hike odds rising, suggesting a higher terminal rate in 2023 than expected at the start of the month. US Treasury yields are continuing to rise, helping keep US real yields propped up across the curve. As long as US real yields retain their elevation, the hopes of a sustained rally by silver prices are diminished, and more downside is possible.

Silver Prices and Volatility Relationship Inverted

Both gold and silver are precious metals that typically enjoy a safe haven appeal during times of uncertainty in financial markets. While other asset classes don’t like increased volatility (signaling greater uncertainty around cash flows, dividends, coupon payments, etc.), precious metals tend to benefit from periods of higher volatility as uncertainty increases silver’s safe haven appeal. Market volatility has been easing, leaving silver prices adrift.

VIX (US S&P 500 VOLATILITY) versus Silver Price TECHNICAL ANALYSIS: DAILY PRICE CHART (October 2021 to October 2022) (CHART 1)

US stock market volatility (as measured by the US S&P 500 volatility index, VIX, which tracks the stock market’s expectation of volatility based on S&P 500 index options) was trading at 33.62 at the time this report was written. The 5-day correlation between the VIX and silver prices is +0.19 and the 20-day correlation is -0.13. One week ago, on October 11, the 5-day correlation was -0.07 and the 20-day correlation was -0.62.

SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (October 2021 to October 2022) (CHART 2)

Silver prices retain a bearish technical structure. Momentum remains pointed lower . Silver prices are below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD has issued a bearish crossover and is falling below its signal line, while daily Slow Stochastics are entering oversold territory. As noted last week, “a return beneath the downtrend from the April (yearly high) and August swing highs would suggest that the bullish breakout has truly failed, and a return to the yearly low at 17.5590 could be on deck.”

SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (November 2010 to October 2022) (CHART 3)

Nothing has changed in recent days, insofar as “there is a delineation between a longer-term bullish or bearish perspective (at) 21.4500/21.6800, and a return back above this range would suggest that the bearish breakout in 2022 failed, and thus a more constructive outlook – through 2023 – would be appropriate, [but] this never transpired. Accordingly, the bearish breakout remains the primary thrust, suggesting that more weakness may be enroute before the ultimate low is found.”

IG CLIENT SENTIMENT INDEX: SILVER PRICE FORECAST (October 18, 2022) (CHART 4)

Silver: Retail trader data shows 94.80% of traders are net-long with the ratio of traders long to short at 18.22 to 1. The number of traders net-long is 3.02% higher than yesterday and 36.31% higher from last week, while the number of traders net-short is 6.61% higher than yesterday and 47.13% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Silver prices may continue to fall.

Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Silver trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist